IBM Corp. Indiana contract

"We have all kinds of issues with the way we do business. We have no standard practices." Zach Main, deputy director of the Indiana Division of Family Resources

For Indiana, entitlement eligibility outsourcing could be a dream come true. For Texas it's been more like a nightmare. Both states are in the uneasy vanguard of an ambitious attempt to modernize decades-old processes and systems at health and human services agencies.

At stake are potential savings of hundreds of millions of dollars, dramatic improvements in speed and efficiency of delivery of services and adherence to welfare-reform regulations that otherwise lead to hefty fines for states unable to prove progress in moving from federal subsidies to employment. Comprehensive retooling of paper-based legacy systems also promises an aggressive approach to prevention and detection of otherwise undetectable fraud and abuse.

"Policy changes made by the federal government have driven modernization," said Brian Whitfield, vice president of state and local government for IBM Global Services. States that want to see a real difference will have to similarly change their business processes, he said. Upgrading the information technology without updating the processes will have only a minimal effect.

States have neither the IT infrastructure nor the staff expertise to go the modernization route alone. But private-sector IT providers, ready for upfront investment so long as the profits can be spied somewhere in the thicket of multiyear milestones and deliverables, are stepping up. The biggest players have the greatest advantage: deep pockets and a ready bench of experts that together can justify the considerable upfront investment in breaking systemwide incompatibilities and creating interoperable, user-friendly prototype replacements.

In December 2006, an IBM-led coalition landed a 10-year, $1.16 billion deal with Indiana to provide administrative and technological support for the state's eligibility-determination process. The IBM team will help modernize the Indiana's failing eligibility system, state officials said.

At a little more than 6 percent, Indiana is last on national rankings of states that monitor the portion of those recipients transferred from welfare to work.

No bandwagon vaulting

Nationwide the human-services modernization market could theoretically amount to tens of billions of dollars for IT providers, said John Kost, managing vice president for Gartner Government and Health Care Research Worldwide. That figure is based on a high level of nationwide adoption that so far hs not been borne out in reality. Most states are waiting to see how successful Indiana and Texas can be with their outsourcing efforts before vaulting onto the bandwagon, Kost said.

There are many pitfalls, including disgruntled public employees forced onto private-sector employment rolls or out of work entirely. As the IT kinks are ironed out, citizens may have their benefits delayed or interrupted. Even the savviest of IT efforts can be gummed up by the unintended consequences of a re-architecture. And skeptical federal lawmakers want assurances that states will retain oversight of firms whose profit motives may not dovetail with devotion to citizen needs.

Kost summarizes part of the dilemma: "Can government create a meaningful contract that transfers fiduciary responsibility for what is regarded as a core government responsibility ? health and welfare ? to the private sector? Government procurement is horribly inflexible under most circumstances and trying to create a contractual relationship in a new market is chronically difficult."

Scaling back

Difficulties have already surfaced in Texas. The state's Health and Human Services Commission has scaled back private-sector involvement in a 2005 contract with the original goal of coupling Medicaid eligibility with broader social-services eligibility. Texas planned to offer eligibility services at four call centers in the state, maintain and support an integrated eligibility determination system and broker programs for those who receive food stamps, cash assistance and benefits through Medicaid and the state's Children's Health Insurance Program (CHIP).

The effort, led by Accenture, was originally worth $899 million, but has since been reduced to $543 million. In December 2006, Texas said it would rebalance the model by limiting the contract's original scope after an Accenture subcontractor generated unnecessary letters to CHIP applicants requesting information. The subcontractor denied applications, the state asserts, even though the requested information was either on the original application or had already been received but not properly processed.

Modernization will continue, albeit at a more modest pace. The Accenture-led team will continue to work behind the scenes, processing food stamp, Medicaid and welfare applications, but Texas will reassume an active oversight role. The state says it will recover about $30 million in contract costs through service credits and discounts and convert 900 temporary positions in eligibility offices to regular-status positions to help stabilize the state workforce.

"Texas took a very big bite of the apple," said Zach Main, deputy director of the Division of Family Resources at Indiana's Family and Social Services Administration. "We had the advantage of being a year and a half behind [their plan]. We watched what Texas did and realized it was too much for us to do at once. It was much too risky."

Standardizing business practice

Main said the estimated $50 million in annual savings Indiana expects to recoup from the IBM deal is spread over 10 years and is a relatively small part of the initiative. What's more important is establishing accurate eligibility review, more responsive citizen services and metrics to address anticipated Medicaid growth rates.

"We have all kinds of issues with the way we do business. We have no standard practices," Main said. "We wanted to see what the private sector could do. Why should the state reinvent the wheel? Why not purchase the expertise and products already out there?"

A key element in the Indiana plan, and one that has by Main's account prevented some likely objections, was the insistence by the state that IBM hire and retain 1,600 state workers whose jobs are privatized under the plan. Main asserts that although there's been some opposition, the unions are almost completely driving the effort, and 95 percent of the affected state employees have accepted a same or better salary and benefits working for IBM.

"Many states are watching Indiana very closely to see how things go," IBM's Whitfield said. "Other states are obviously very interested in doing something similar, provided they can see the benefits."

Kost said pinpointing benefits could take some time. Measuring success in dollars and cents will continue to be a challenge, and there are no commonly accepted methods to measure modernization's effectiveness. Federal officials also areon constant watch for irregularities. Any state plan must undergo close federal examination. The childhood of this fledgling market could be one marked by skinned knees.

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